Shifting Sands: Prices, Supply, Demand Concerns Remain in Permian

Julie Lerner experienced what she described as a moment reminiscent of an American television drama series while attending a recently held frack sand industry event in Houston. Operations at one sand mine had temporarily gone down in the Permian Basin.

“It kind of reminded me of one of the episodes of ‘The West Wing’ where everybody’s phones start buzzing and everybody gets up and walks fast out of the room. It was kind of crazy,” said Lerner, CEO of the newly launched PanXchange frack sand exchange service. “The next thing we see is a bid for 5,000 tons on our exchange because the supply suddenly wasn’t there. It is tight today. People know it’s going to ease up a little in the future. But it can’t be soon enough for people.”

Life in the Permian, where some operators pump more than 5,000 tons of sand per well to help free trapped hydrocarbons, may not be as cutthroat as it was for characters of the fictional West Wing of the White House. But tight supplies are causing some angst in the basin.

The 100-mesh sand appears to be the most desired.

Additional supplies are expected to come online with sand suppliers such as Badger Mining Corp., Emerge Energy Services, Hi-Crush Partners, Smart Sand, Unimin and U.S. Silica planning to add new capacity.

But there is some consternation in the market about whether all mines planned to come online this year will happen.

“Not all the mines that are permitted will come online this year. The industry has seen this type of sand rush before in Wisconsin,” Todd Bush, principal and cofounder of Energent Group, told Hart Energy in a statement. “Thus far, four Permian sand mines are producing and selling sand. As the new mines come online, spot pricing for Permian sand will likely move the average price per ton closer to $75 per ton.”

That could be considered an improvement given how much sand costs have increased in recent years.

Price uncertainty was part of the reason why Lerner, a commodity trader by background, said PanXchange launched in October 2017, becoming the first known exchange for frack sand in the U.S. The exchange provides aggregate spot, forward physical procurement and sales via a Web-based platform. It has more than two dozen members that comprise E&P, oilfield service and sand supply companies.

The PanXchange benchmark price—which Lerner told Hart Energy is predominantly based on bids, offers and trades in the marketplace—was $112 per ton for the week of Feb. 5 and $120 per ton for the week of Feb. 12. The price, which is for Northern White sand in Odessa, Texas, continues to rise, she said.

Watching Prices

Sand suppliers, both nationally and regionally, were able to raise prices during the downturn, with some increasing prices by more than 30% since the downturn’s start. Vista, for example, has increased its sand prices per ton by 24% since 2015, while Hi-Crush reported a 38% hike in prices in 2017, according to Energent Group.

Lerner pointed out that some companies locked into long-term contracts for sand, which make sense until another type of sand arrives on the scene.

“Oftentimes the price of sand is bundled into a contract and an E&P doesn’t even know the price they’re paying. But there are some downsides to their long-term contracts. That is the dependence you have on other players in the chain,” Lerner said.

The lack of price discovery and its impact on the supply chain led to the formation of the sand exchange, which recently opened an office in Houston. “If you’re the E&P or the operator or the miner obviously one of you wants to buy really low the other wants to sell really high, and neither of you are really for sure what the price of sand is,” she said.

Continued attention on frack sand comes as the oilfield service industry, hit hard by lower commodity prices that forced its customers to slow spending, regains strength.

In market insight released in late January Bush said “The public frack sand companies have shown an average increase of 9% in gross margin improvement over the last three quarters. The recovery has been much faster for these companies compared other oilfield service segments.”

With local sand gaining traction, Bush foresees in-basin sand companies seeing healthy margins when they start producing sand in 2018 if the price per ton of in-basin frack sand is between $50 and $55.

But at the moment supply remains tight.

In an analyst note Feb. 16 Tudor, Pickering, Holt & Co. said one of the major oilfield service companies said delivery constraints associated with the Canadian National Railway are impacting activity. The constraints revolved around cold weather issues.

“The sand market appears tight Q1’18, but some (possibly much) of the constriction stems from supply/demand preference mismatch (i.e. mesh-size). 100-mesh [is] allegedly what’s seeing particular tightness,” analysts said, calling this ironic considering this is what is primarily in-basin in the Permian. “A private sand producer we spoke to with an attractive logistics footprint noted some recent shipment issues but the delays sounded manageable.”

Of the sand producers, Fairmount Santrol Holdings Inc. and U.S. Silica Holdings appear to have the least potential exposure to these issues, the analyst said. “Sidebar but also of note, we’ve now picked up multiple datapoints indicating potential turbidity issues with local sand…stay tuned for more on that front.”

Shifting Sands

Sand has become a hot commodity topic as shale players tinker with their completion recipes aiming to maximize production by concocting the right mix to crack open rock. As oil prices have steadily climbed from lows hit during the downturn operators have stepped up completion and production activity in shale plays across the U.S., driving the need for sand.

“Northern White has the advantage when it comes to crush strength. From a well performance perspective, the results continue to be mixed as more operators evaluate the impact of in-basin sand,” Bush said. “Northern White will have strong share of the market in 2018 as buyers begin to understand the new dynamics.”

Speaking during a fourth-quarter 2018 earnings call, Pioneer Natural Resources CEO Timothy Dove said the company is conducting pilot projects to test finer mesh sands, making sure the company doesn’t experience any degradation of well results.

“The current feeling internally is this would not be the case,” Dove said according to a Seeking Alpha transcript. “The 40-70 and 100-mesh will work just as well as some of the coarser grades. But that is something we’ve got to be protective about.”

Bush said lower cost sand is gaining credibility in the market, particularly in the high- and low-pressure areas of the Permian’s Delaware and Midland sub-basins.

“For many E&Ps buying Northern White, the question is not ‘if we should try in-basin sand’ but ‘when will we test it on our wells,’” he said.

Currently, the Delaware Basin is averaging nearly 2,000 pounds of proppant per lateral foot, up 32% from 2016, Bush told Hart Energy. “Midland Basin is averaging 1,500 pounds per lateral foot, an increase of 13% from 2016. E&Ps will continue to emphasize capital efficiency and well performance so we do not expect the amount of sand per lateral foot to dramatically increase unless there are measurable performance gains.”

Bush said that E&P are switching to local sand as more operators validate well performance and bring down costs.

“E&P supply chain groups see tangible cost savings, especially where last mile transportation costs can be reduced,” he said.

Navigating Logistics

Occidental Petroleum, one of the Permian’s largest acreage holders, has taken matters into its own hands with a maintenance and logistics hub called Aventine. The hub is online with sand delivery and is scheduled to be fully operational by the end of the second quarter, Jody Elliott, Occidental’s senior vice president and president of domestic oil and gas, said on the company’s Feb. 14 earnings call. Partnerships formed as part of the Aventine project are expected to lower costs for the company.

“But we believe the full value implications are much higher as we expect improvement in time-to-market, last mile and well site logistics, safety and future operating costs,” Elliott said.

He later noted that Aventine includes “not just sand delivery, but all country tubular goods on rail instead of truck, the OxyChem hydrochloric acid facility, our work with Schlumberger there, a new sand delivery system for the last mile logistics that will drive down trucking and reduce the number of people required on locations. So I’m just naming off a few. There’s a long list of things that we believe continue to improve the cost structure, the capital intensity of our work in the unconventional business.”

Bush pointed out that frack sand companies have also worked in the last three years to improve last-mile logistics capabilities as they vie for position in the sand supply chain alongside pressure pumpers and third-party trucking or logistics companies.

“Vista, like U.S. Silica, Hi-Crush, Unimin, FM Santrol, and Emerge, knows the critical components to solving the E&P sand supply equation: low cost, proven regional sand; integrated logistics that increase efficiencies; pad-capable storage solutions; and Premium sand that meets frack design requirements,” Bush said in the note.

Going Vertical

To get a better handle on sand challenges, some companies—E&Ps and oilfield service companies alike—have opted to get into the sand mining business.

EOG Resources Inc., for example, operates its own sand mine and sand processing plants, including two in Hood County, Texas, and another in Chippewa Falls, Wisconsin, to lower costs and meet its well completion needs.

The industry could see more companies moving in this direction.

“More E&Ps and oilfield service companies will evaluate vertical integration and direct sourcing options. There are few integrated logistics options for E&Ps today,” Bush said. “Acquisitions in sand and logistics during 2018 will have a significant impact on the market. Already, we see Wild Horse Resources acquiring a sand mine, Schlumberger starting a mine in the Permian, and several pressure pumpers securing supply through longer-term contracts.”

Pioneer also owns a sand mine in Brady, Texas. The company said in its fourth-quarter 2018 earnings release that it has signed a contract for initial offtake of sand from the facility and is negotiating additional contracts, which prompted it to defer expansion plans at the sand mine. The onslaught of more sand on the horizon was also a factor.

“There’s going to be a lot of mines, it seems like, that are going to be put on production and such that we might have various different suppliers that would allow us to then, as was stated earlier, [to] not proceed with the expansion of Brady,” Dove said in the transcript. “That’s a substantial amount of capital we’d rather put into wells. And so I think the main objective is to go through the technical work, make sure that we in fact can lock in low-cost sand. We may be able to reduce our sand cost by 20% by doing this, so there’s a substantial carrot our there for us to prosecute on this point.”

Pioneer’s Pioneer Sands is among PanXchange’s members, according to the exchange service.

“We’re finally giving the marketplace some transparency and market access, which is crucial especially today when there is super-tight supply,” Lerner said. “Everyone is waiting for this Permian sand to come online.”

But there are other issues brewing.

Growing sand supplies could create a storage problem.

“There isn’t a lot of storage space. I’m foreseeing that being a problem by the middle of the year,” Lerner said. “Between the trucking problems and the new supply people are going really need some place to park their sand, and there’s not enough storage space today in the market.”